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U.K. is test of how global supply chains lessen gains from devaluations

Bv CsnrsropurR WrurrALL AND Mu<r Bmp

For decades, economics textbooks arguedthat suddenly weaker currencies are a boonto growth, because they make a country’sexports more competitive or profitable onthe global stage, which in turn boosts do-mestic production and employment.

What if that theory no longer holds?Economists and government officials Etre

increasingly wondering if that effect is di-minishing, especially among advanced West-ern economies with shrinking manufacturing

capacity and supply chains increasingly inter-woven with the rest of the world. The newidea is that much of the benefit from a fallingcurrency is offset by the higher prices paidfor components imported from overseas.

The U.K. is emerging as a test case forwhether globalization has diminished the ef-fect. Although its currency has been battered . Wlgt!.r or how the re,ia-by the finan”cial crisis, the Brexit vote to tior:ryP between a currency,sleave the European Union-which took place :l|9pt and economic growtha year ago June 23-and the country’s fresh ::11holqs has ramifications forbout of pgliq.rt_*certainty, its exporting mternatiolal nolitics. In the

p.werlasrrt responded as .,J*ril?f$HHTr#Hi:tttextbooks might sugsest. . ;;’l ,Iran, doilar. presidentqn.t*:[l’fl1;.,,”i1#., r”:j l^”:,,, iE;;;;,”,..,,.dractory in Middreit-.”,d’l;; ifIT #j.ililf :l#:1;fiiffi:’* ffixl,’#.ffiffiilff tt u+riiii,i us”ll,o,*rail in sterring, J;ffi; *”r,r]if* H?#:Hi.r;**lbeefed-up value of tIr..*r.r_ b.;ll, ,lr_.-“ra oiilrat yearcies used to buy those€oods lf*rr ilr. U.K. crashed out ofoverseas. Higher costs

19, iT: il.” frropean exchange rateported materials, however, aII *f=.h.rrrrrn_, precurior tobut erased that idvarilq:., iil;;i* rhat required a stron_’1ffe have a huge

‘i|919:; r.r;rrrd- than the govern-pendency on international fi.ni.ould sustain. The U.K.iln1f;’,’,il;flii*ffifl 9$i ffil*r,hen went onan ex_pany exports more *,1^.ifr- fftr#il,yyiU##*;lf:of its products and imports ffilrrr-started a recovery.ffi:lll1fil:k1,.il,f.,?-


-99und rer by nearry

says, “isn’t revolutionr.?r1; nt 2.5o/o against the currencies of

nritisrr Lusffi#;i::l_ H.H,g#;r,ffirritlf*ffrom car makers a ,r*”rI-T #;;;..”vered, sparking opti-cessors to lumber mills- are il; in gor.r*ent that ex_discovering the same ,-rl po.tr^*o,rrd rise. In zotz,rhen_Adam Poseq president g._,h. ilJi:” d..rrrry chief deorgepeterson Institute for Interna- Oil;rne targeted an increase intional Economicg and a mem- .rp”ri, t” €l-trillion by_iozo,ber of the Bank of Engtand,s affi e+gg b1lion tt rt v.i. ryrate-setting monetary nolicl iirl”.r’i’.o f zor’,exports hadcommittee between zbo^g “nd il;i;r, st E,4zbiltion.z}tz, says the enects-ii”cur_ -‘-wil”rr. arr. currency tookfff..f#?tr:.Hp?nf#T: ,,o,iJJ’ beating arter the

ciarcrisisinz-qqffi,s;,.# ifix[,y*,*j.’#,’*,u:;depreciation didn;t,.”rfi i, tfr. ili# #,pickup in exports ,,we wourd Bo%

“, lilrn:.8-t:lr expo,rtshave expected,” he sayi.

“ouu]’o…-o.’,_’F -vehicles, helps

,#”tjUfil#:,Ul if:-,Hlil,,;*..,,?**.;used to,,, said Mr. posen

‘-ls a Declining Pound Good for the U-.K.?The post-Brexit decline in the British pound has fueled inflation. Economists believe

an export-related

boost to the economy is unlikely to materialize.

tr” #





ui$ iii:





The British pound has fallen since the Brexit vote…

Pound vs. the dollar

2.2 dollars per Pound

2008 financial crisis

ld;0 lrood

Exports have risen, but so

have imports…Total trade in goods.

f40 billion

…leading inflation to beginincreasing.Consumer price index



…in part because many U.K. companies rely heavily on global supply

chains…lmport content of exports

Chemicals and r#I*r+4+lrtilrt*,ld 33%

Machinery and 1’+’++il+tl’t+irr 34%equipment BY’Motor vehicles, flfni,ifjiiiit.iix{ifft 45%

Food products, i,iiil;l+r+$rfr.ir+ 27lo

Agriculture, hunting, ili”lliiltiiitiitll:::,;; AY’forestry, fishing lAo/o

-Tilffi- ” l’io rotal

…calling into question whether the U.K. economy wilt see the kind of sterling’related bounce it has

fi:il:l,ffi|r’rt:r. as a percentase of GDp after past sterrins depreciations3o/o


iii 3Q 1967I 2Qre92

lQ 1975

t 4Q20U

ffi Exports

ttrit;t!!iii;:t1:,.1:.!ffi A%l9o/o



‘!excluding extremely volatile items

Sour,.r, iactSet (currency); U.K.’s gffice For National Statistics (CPl, exports vs. imports); Pantheon

Macroeconomics (depreciation); 0rganization for Economic Co-operation and Development (import content)

‘1″”” -* 1-

13 14″‘”‘1″‘ ‘ ‘l

15 16,/










sportS cars sold in New Yorki;i g15o,ooo would bringi,,o*. f,100,000′ With the

“”*a now at $1.27, such sales

iring an extra t18,000′ Butover half the car’s compo-nents must be bought-fromabroad, blunting the effect’—

“Duiing the Past decade’ a

Iot of auto suPPliers havemoved offshore,” saYs Aston

Martin Chief Executive AndYPalmer. “In consequence, Youdon’t get the benefits’”

In iecent months, sterlinghas recovered from its Postiii.ot lows and is currentlYao*n fSZ” against the dollar and

igz” “g”irsf

the euro’ AnalYsts

;Aril Pessimistic about the.*t.n.v as Britain heads forairor.u ftom its largest trading

Brexit vote

S lmports

partrt-er, the European Union.The pound felll7% on Friday

after Frime Minister TheresaMafs ruling Conservative Partyfailed to secure enough seats ina snap general election to aloneform a government.

Global economists are debat-ing how much exchange ratesaffect trade for developed na-tions. Two recent papers, fromtre World Bank and the Organi-zation for Economic Coopera-tion and Development, foundmovements in exchange rateshad a declining impact on tradein several advanced economies.

The OECD paper said aplunge of sterling in 2008 andthe yen’s decline against thedollar in2012 had little impacton trade. The study said evi-dence suggested companieshad become more embeddedin global supply chains. Be-tween 1995 and 2011, the im-port content of exports rosefrom L4.9o/o to 24.3o/o amongOECD nations.

In May, the Bank for Inter-national Settlements published

new mathematical models forestimating real effective ex-change rates, one measure ofthe strength of a currency. Itsaid without taking into ac-count deep global supplychainq standard exchange-ratemodels “are increasingly be-coming obsolete.”

Academic debateOther economists have re-

sisted the idea, including ateam at the InternationalMonetary Fun{ which came toa different conclusion andfound “little evidence of aweakening in the effects of ex-change rates over time.,,

In its analysis, the IMF sug-gests a significant currencydepreciation-where curren-cies weaken by at least l}o/o inadvanced economie s, or ZO%in emerging ones-results in a10% rise in export volumesover five years.

The IMF had some caveats.The paper argues the impact

example following a recession.It also suggests that financialcrises dent companies, abilityto take advantage of a depreci-ation, because of the lack ofavailable credit.

‘tn general, however,, the au-thors conclude, .,the role of flex-ible exchange rates in facilitat-ing the resolution of tradeimbalances remains sighificant.,,

Since Britain,s vote to leavethe EU, consumers abroadhave been bulang more Britishproducts. In the six monthsthrough April, the most recentmonth for which the U.K.,s Of-fice for National Statistics haspublished data, goods exportvolumes increased B.t% fromthe year-earlier period. Overthat same period, import vol-umes rose even more, by 4.9%.

“We are not yet seeing anotable narrowing of the[trade] deficit,” the Office forNational Statistics noted in itslatest report.

For some exporters such asScofland’s whisky industry thepound’s fall has been puregood news because most ofwhat goes into a bottle ofwhisky is produced locally.The Scotch Whisky Associa-tion says exports increased 4%last year to over f4 billion.

Most U.K. manufacturing in-dustries, however; can no lon-ger rely on domestic supplychains. In 2015, manufacturingrepresented 9.8% of the U.K.,sgross domestic product, doltmtroml4.7o/o in 2000. tn the U.S.,by comparison, manufacturingrepresented lZ.Bo/o of the GDpin 2015, andLS.So/oin 2000.

As U.K. manufacturing de-clined, seryice industries grewand now are responsible for79o/o of GDP. Those industriesare less sensitive to changes inexchange rates. In the servicessector, the U.K. runs a tradesurplus that grew to 5.4% ofGDP at the end of last year.For London’s huge financialsector, sterling,s tumble hasIittle benefit because businessis often denominated in other

currencies and demand forservice industries tends to belgss price sensitive.

Trade in goods, however, isan entirely different story. TheU.K. deficit in that area hasballooned froml.6% of GDP in1995 to 6.4% last year. It haskept risilU despite imports be-coming more expensive andexports more competitive.This year’s goods deficit,+Iernrrcrh Anril ic CAr 9, hillinn

—Sonre economists have lbngbeen skeptical of the idea thattrade can be shifted bY cur-rency depreciation in the lon-ger ter1n. As a currencY weak-ens, the price of imPortedgoods rises, raising inflation.

“Don’t believe that Britainis going to depreciate itselfout of its current account im-balances,” says Willem Buiter,chief economist at CitigroupInc. and a fbrmer member ofthe Bank of England’s rate-set-ting committee.

Expensive FishTo make matters worsg,

Britain has become so relianton imports to stock its storesthat a weaker pound has in-creased inflation, making lifemore expensive and curbingconsumer spending.

Britain now imports morethan 60% of its fistr. The pound’sfal trigeered a 15% overnightjump in prices for t}te crates ofcod and haddock that MikeWoods buys from the,docks ofGrimsby, in northern England.That cost his food Processingcompany, Albert Darnell Ltd., anadditional t15,000 a week.

Like other food manufactur-ers, Mr. Woods is passing onthat increased cost to consum-ers. Fish and chips have be-come more expensive at theSt. James Fish Restaurant inthe center of Grimsby. ‘We getpeople complaining now,” saYswaitress Eve Barrow.

Retail prices of cars, shoesand potato chips have risen.Last October, an increase in theprice of Marmite, a stickY Yeastspread beloved by the British,triggered front-page headlines.Economic growth in the U.K.slowed in the first quarter ofthe year, with higher Priceshurting consumer sPending.

While more expensive im-ports should presdnt oPPortu-nities for British manufacflrersand suppliers to step in, it willtake time for industry to adjust.

Around 80o/o of the timberused in U.K. construction isunported mainly from Scandi-naviA according to the TimberTr4de Federation. It isn’t easYfor Britain’s construction in-dustry, which is resPonsiblefor around 7o/o of GDB to shiftquickly to domestic suPPliers.

Keith Ainslie of James Jones& Sons Ltd, the U.K.’s largestsawmill, says the firm’s mainplant in Lockerbie, Scotland isalready “working full tilt.” Pro-cessing more logs would meanbrrilding another sawmill, a

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